On money and negative interest rates.(you can read about this on WSJ at a fee, or Bloomberg, or Zero Hedge (which I admittedly take with a pinch of salt) for free.)

Hmm. Harvard. As one of my friends (a world-class leader in his field, and not trained at Harvard) said dryly ‘You can tell a Harvard man – you just can’t tell them much.’ It has produced a large number of billionaires. This may have bearing on the rest of this. It also has an economics professor called Ken Rogoff. I’m sure it may well have valued academics whose work does not make me imagine an outcome of mobs, smoky torches and pitchforks…

Professor Rogoff believes that negative interest rates could be a good thing. He also believes that cash (as in physical money) per se is a bad thing. The former forces spending, so vital for the engine for economies, and the latter facilitates crime, money laundering, tax evasion, and even illegal emigrants.

I suspect he’s completely right… from the point of the billionaires, or at least the very wealthy and powerful. Probably from the point of view of government (who hate competition in the crime racket. That is after all the origin of several ruling houses, and I suspect most government, despite smoke and mirrors to contrary).

But what about as a general thing: for those unlikely to go to Harvard or be billionaires or even millionaires?

I would argue that for those outside that select group – this can be translated into one word: serfdom.

Let’s think about the negative interest rates, for example. Why, it would mobilize cash, make for immediate consumption. Isn’t that good? There is no point in saving as that money will be worth less, next year. And mysteriously, inflation will not go away… so it’ll be worth less, twice. Now I’ve argued before that inflation effectively robs savers for profligate borrowers, and that historical norm cycle of inflation followed by deflation worked both to encourage and build savings and then to encourage investment –as that could bring a better return than just holding onto that money. There was an almost seasonal quality to it, a sort of drawdown-refill-drawdown-refill-drawdown process – which worked in the longer term – even if it wasn’t much fun at times in short term (depending if you were a debtor or a saver). The world slowly got to be a better place to live in.

Negative rates – available to banks from the state, and paid to savers by the banks (not, naturally to borrowers, would indeed free a rush of savings – and make a rush of borrowings. Wonderful for stimulating the economy! Wonderful for banks – after all if the bank can borrow at -1% and lend at 5%, it’s no different to borrowing at 3% and lending at 9%. They profit on the margin, not the figure. Their figure is always positive.

But where is the refill? And what happens next year?

“But we haven’t had deflation for decades! Where was that refill? We’ve got fiat money and reserve banks and printing presses now.”

Indeed. Outside habit and obstinacy saving has not been encouraged for a long time. Fiat money printing (and the inflation this causes) have ruled instead. Yes, there have been investments that could leave you making a return after inflation. But generally speaking, the banks and the wealthy tried to limit that. But it was possible and wise to at least lose slowly while adding your savings, having security, and possibly the goods or services that you wanted at less cost than if you borrowed, and then spent years paying it off. As an indebted borrower, you are, de facto, a serf, in thrall to your lender, chained to that job (or another that pays well enough to match). You dare not lose it, or you could lose everything. It’s not a long step to the serf of the middle ages, who worked the land he did not own, lived in a miserable hut at his master’s will, who could not leave or even change jobs without his master’s permission – a master who took most of the proceeds of his labor and lived very well off it – a life of insecurity, working principally for someone, who, often as not merely inherited the position and invested precious little of that profit in making things better for the serf.

“Ah, but if you have a good credit record, you have security! You can borrow as much as you might need.”

Indeed. And you can give part of your income to the lender, and you will need to keep working. And the threat of bankruptcy, forfeiture and a poor credit record will keep you on the master’s estate. That part of your income that you will give to lender = cost of good or service + cost of the loan allowing for depreciating value of money + handsome profit for the lender. If you’d simply stuck dollars in the bank and got interest largely cancelled by inflation you’d have lost some to inflation, but the handsome profit for the lender would have been yours to spend – which as Joe Average makes money circulate more than Fred Banker 1%, and spends locally would have been better for the economy – if not Harvard graduate billionaires. And if you’re hurt or sick or unhappy at your job… well you don’t have to worry about paying it back, and remain trapped there.

At best negative interest rates cause a brief burst of consumption and investment, and thereafter mean that any consumption and infrastructure investment must carry parasitical rent seekers who add value but mean the consumer and infrastructure investment must carry their weight as well. And they have no practical choice but to (unless of course you enter this equation with a lot of money. In which case you produce a product, which you sell, and the consumer pays both you and the bank if that product is something they can’t afford in the very short term of accumulating money.

Really? Well, yes, people are robbed. You can work out the probability, and you can take measures to reduce the chances. Does that beat the utter certainty that some of cash will ‘vanish’ every day you keep it in the bank? It’s an equation a lot of people might like to reach their own decisions about – but if there is no cash, you won’t.

And have you worked out: if there is no cash, who will keep track of the numbers? Who will provide that little card hooked up to the computer system? Ah yes. Mister negative interest rates bank. Or failing that, perhaps the alternative scenario. Mr Negative interest rates and tax you government. While neither would protect you from robbery – not by themselves or others, neither have a record that says “This would be a good idea” – either for the economy or the individuals. The one thing I think we can guarantee is that it would not stop crime, or curb tax evasion. Oh yes, the government would extract more rent from Joe Average. But the rich and powerful don’t pay taxes now, and would, I assure you, not pay taxes then. But the serfs would. Much better for collecting from them. You can just take as much as you like from their accounts (the banks ALWAYS play ball with the bigger crooks, including governments).

One has to ask: what without the possibility that people would keep their cash under the mattress is there to keep either the banks – who usually work hand in hand with governments, or the governments – who usually work hand in hand with the banks, honest? Seriously, the very existence of cash is protective – just as an armed society is protective against despots.

As for the illegal immigrants… well. That depends on the serfdom conditions in their own countries – or even outright starvation. I don’t think a lack of cash to send home will stop ‘em. And, anyway, the people Professor Rogoff’s economics work for don’t care where the serfs that scrub their floors and manicure their lawns come from. They can be legal or illegal serfs.

Remember what happened when Spain rolled out the ‘new’ currency? The ‘underground’ economy was almost twice the regular economy. There was a lot of churn and turmoil when people started bringing those ‘hidden’ pesos out and turning them in. Quite a few were arrested, if I remember correctly, for black marketing and currency manipulation…

Most swords have two edges. Undoubtedly cash IS used by criminals. Undoubtedly guns are used by criminals. If that’s logic for banning cash it’s logic for banning guns. This has been done in various places. Has it stopped criminals using them?